A cornerstone of new bank resolution policies across the world is the introduction of bail-ins to redistribute the costs of bank failures from taxpayers to bank creditors. This column uses the bail-in of two banks in Cyprus to examine how bank depositors react to this way of resolving a crisis. In the short run, customers who experienced deposit or bond bail-ins increased their holdings of cash and reduced deposits, while those who faced only an equity bail-in did not change their behaviour. In the medium run, confidence in the banking system among all depositors remained low.

The basic ingredients of the policy prescriptions in response to the euro area debt crisis were quite similar across Southern Europe. This column explores the economic, political, and institutional factors that differentially affected the success of these prescriptions from country to country. Policy timing and sequencing, the balance between fiscal consolidation and structural reforms, and external constraints all play crucial roles. Future reform programmes should be calibrated to the distinct economic, social, and political features of targeted countries.

Cyprus has been striving to get back on its feet after a painful bailout in 2013. This column examines the lessons that could have been drawn from the Cypriot experience by Greece in its recent attempt to seal a bailout deal. Specifically, lengthy negotiations – while tending to mitigate the risk of contagion – offer little benefit for debtor countries, and capital controls, once implemented, cannot be easily undone. While they come too late for Greece, these lessons can be important for countries in need of financial assistance in the future.

Russian involvement in Cyprus was widely recognised during the acute phase of the most recent EZ crisis. This column argues that some of this is driven by corruption-linked money laundering. Using official Russian statistics, the authors estimate a standard model of FDI location to identify usual patterns related to nations with lax anti-money laundering measures such as Cyprus and the British Virgin Islands. Funds from such nations were biased towards locating investments in the most corrupt Russian regions compared to a group of genuine foreign investors.

The crisis in peripheral Europe is deepening and spreading to the core of Europe. This column argues that it’s time for the Eurozone to shift gear. Eurozone members should use the Emergency Liquidity Assistance facility provided for under the statute of the European System of Central Banks to undertake ‘overt money financing’ of government debt. Greater cooperation – for a time – between central banks and fiscal authorities is, despite arguments to the contrary, in no way inconsistent with the independence of the central banks.

Depositors in Eurozone banks are facing a steep learning curve on just exactly what deposit insurance means. This column points out that the precedents set in Cyprus and Iceland show that deposit insurance is only a legal commitment for small bank failures. In systemic crises, these are more political than legal commitments, so the solvency of the insuring government matters. A Eurozone-wide deposit-insurance scheme would change this.
This reposted column corrects an error, due to the editor, that was in the first posting.

Cyprus has imposed temporary capital controls. This column sheds light on how temporary and how damaging they are likely to be, based on Iceland’s experience. The longer controls exist, the harder they are to abolish. Icelandic capital controls, which have been ‘temporary’ for half a decade, deeply damage the economy by discouraging investment. We can only hope the authorities that created the chaos in the first place realise that temporary really needs to mean temporary.

The Monday morning Eurozone Cyprus bailout is now public, although details are scant. This column argues that this package cancels out some of the mistakes in last week’s package. Last week, the Troika should have vetoed the small-deposit tax and prepared a plan B for the Cypriot parliament’s rejection. Avoiding the risky scenario of a Cyprus exit will require further fiscal commitments from Eurozone partners. One possibility is a temporary, but EZ-wide, 'deposit reinsurance', or backing of national deposit-guarantee schemes by the ESM.

Cypriot banks urgently need restructuring and downsizing, but a functioning financial system is necessary to handle Cyprus’s transformation to an economic model not based on an oversized banking sector. This column argues that splitting the Cypriot banking system into a bad ‘legacy’ part and a good forward-looking part seems the only feasible and effective solution to resolve the current crisis and restore trust. The Eurozone's resources would be most useful in this bank-resolution process.

The Cyprus rescue package has elicited sharp reactions. This column argues that a tax on deposits is logical given the limited options, but guaranteed deposits should be spared on fairness and systematic grounds; a 15% tax on big deposits would be enough. Contagion is unlikely since Cyprus is different. Italian and Spanish savers are already alert to surprises such as the 1992 Italian bank deposit tax.

Eurozone leaders’ radical step of putting insured depositors in Cypriot banks in harm’s way was not their only option. This column argues that none of the alternatives were pleasant but some were less ominous.

The Cyprus bailout package contains a tax on bank deposits. This column argues that the tax is a deeply dangerous policy that creates a new situation, more perilous than ever. It is a radical change that potentially undermines a perfectly reasonable deposit guarantee and the euro itself. Historians will one day explore the dark political motives behind this move. Meanwhile, we can only hope that the bad equilibrium that has just been created will not be chosen by anguished depositors in Spain and Italy.